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If Pres. Obama has his way, starting next year, it will be substantially more difficult for the ultra rich to pass along wealth to children and grandchildren without giving Uncle Sam his due.

The President's proposed budget for 2013, issued yesterday, would permanently restore the estate tax rates to those that were in effect in 2009 and severely curtail some popular high-end tools for shifting assets to future generations. The Green Book, as it is called, downloads here as a pdf.

Under current law, we can each transfer up to $5.12 million tax-free during life or at death without incurring a tax of up to 35%. That figure is called the basic exclusion amount. In addition, widows and widowers can add any unused exclusion of the spouse who died most recently to their own. This enables them together to transfer up to $10.24 million tax-free.

Unless Congress acts before then, at the end of this year the current $5.12 million per-person exclusion from the federal estate and gift tax will automatically dip to $1 million and the tax on transfers above that amount will go up to 55%.

The same threat loomed at the end of 2010, and the President capitulated to Republican lawmakers, putting in place the current very favorable system for two years. What will actually happen at the end of this year is anybody's guess. But the budget gives us a clear idea of what the President would like to do. And it's not a pretty picture for rich folks or the wealth management industry.

Under the President's plan, the exemption from the estate and generation-skipping transfer tax would drop to $3.5 million from $5.12 million per person. Perhaps more importantly, the tax-free amount for lifetime gifts would decline to $1 million. And the top tax rate would rise to 45% from 35% for transfers during life or death that exceed the limits.

There's been talk--and some feeble attempts--for at least five years to restrict what are called leveraging techniques: sophisticated estate planning strategies that pack more into the lifetime exemption amount and minimize the gift tax owed. If the latest budget is any indication, the President means business this time. His budget mentions not only tools that have been a target in the past, but also a hugely popular one that didn't seem to be previously at risk.

Here's what's at play:

NEW TARGETS

Grantor trusts. This is not a single variety of trust, but a set of characteristics that can be incorporated into various types of popular trusts. The term refers to the fact that the person who creates the trust, known as the grantor, retains certain rights or powers. As a result, the trust is not treated as a separate entity for income tax purposes and the grantor, rather than the trust or its beneficiaries, must pay tax on trust earnings.

A 2004 Revenue Ruling made it clear that paying the tax is not considered a gift to the trust beneficiaries. Yet this tax, on income that the grantor probably never receives, shrinks his estate. At the same time, assets can appreciate inside the trust without being depleted by ordinary income taxes or capital gains taxes.

Until now, another attractive feature of these irrevocable trusts is that assets placed in the trust are removed from the senior family member’s estate. From an estate and gift tax perspective, the transfer is treated as a completed gift. The value of the assets is frozen at the time of the transfer, so that future appreciation is not subject to estate or gift tax. These hugely popular trusts have been used for a broad range of people, from young entrepreneurs with mushrooming assets to elderly couples with securities portfolios.